Recent Supreme Court decisions such as Hobby Lobby and Citizens United are perhaps indicative of expanding legal rights and powers of corporations. Some who oppose this perceived expansion of corporate rights argue that corporations are being treated as if they are people (often invoking Mitt Romney's proclamation that “corporations are people, my friend” to a crowd at the Iowa State Fair in 2011).
Nonetheless, a federal judge recently ruled that corporations are not capable of “willful and malicious” conduct that would subject them to punitive damages under California law; instead, only a corporation's officers, directors or managing agents can commit such conduct. But did the judge rule that corporations are immune to punitive damages for willful and malicious conduct?
Judge Beth Labson Freeman recently issued an order on a motion to strike in Taiwan Semiconductor Mfg. Co., LTD., v. Tela Innovations, Inc. (Case No. 14-cv-00362-BLF) out of the Northern District of California. In its complaint, plaintiff Taiwan Semiconductor Manufacturing Co. (“TSMC”) brought claims against defendant Tela Innovations, Inc. (“Tela”) for fraud-deceit, breach of a non-disclosure agreement contract, trade secret misappropriation under the California Uniform Trade Secrets Act (“CUTSA”), and breach of a contractual cooperation and licensing agreement.
TSMC provides semiconductor fabrication services to customers who provide their own circuit layouts but lack semiconductor manufacturing capabilities or simply wish to use TSMC’s services and technology. In order for a customer to use TSMC’s services, the customer must comply with TSMC’s “Design Rules,” which TSMC develops and claims to treat as “highly confidential, proprietary information” – trade secrets.
In its complaint, TSMC claims that Tela approached TSMC with a circuit design utilizing a “gridded array approach” for which it had a pending patent application. The parties entered into a non-disclosure agreement under which TSMC would provide Tela copies of several of the confidential Design Rules “only … for the purpose of mutually beneficial technical and business developments.” Over the following three years, the companies collaborated to test the viability of Tela’s circuit layout designs and eventually entered into a collaboration agreement to co-develop circuit layouts.
TSMC, however, claims that Tela used TSMC’s confidential Design Rules to amend the claims of certain continuation patent applications by Tela, and to add a limitation to the independent claims of one of the applications in order to overcome rejection. TSMC ultimately alleges that its confidential information is “reflected in the claims” of at least four Tela patents and that Tela misappropriated TSMC’s trade secrets.
As part of its third cause of action, TSMC alleged that Tela engaged in “willful and malicious” trade secret misappropriation and that, under California Civil Code sections 3426.3 and 3426.4, TSMC was entitled to exemplary damages equal to twice the actual damages caused by the misappropriation.
TSMC’s Motion to Strike
Tela filed a motion to strike the fraud-deceit claim and TSMC’s allegations of “willful and malicious” conduct in its trade secrets claim. As an initial matter, the court struck the fraud-deceit claim with leave to amend, ruling TSMC failed to adequately plead sufficient facts to support a fraud cause of action under the heightened pleading requirements of Federal Rules of Civil Procedure Rule 9(b).
As for the motion to strike the “willful and malicious” language, Tela argued that the court must strike these allegations because TSMC failed to identify any particular individuals that committed the allegedly willful and malicious conduct, which rendered TSMC’s “‘willful and malicious’ allegation and the corresponding prayer for ‘exemplary and punitive damages’ fatally insufficient.”
Judge Freeman ultimately agreed with Tela, stating in her opinion that “[u]nder California punitive damages law, a company simply cannot commit willful and malicious conduct – only an individual can.”
Judge Freeman noted that California Civil Code section 3294(b) provides that “[w]ith respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification, or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.” Accordingly, Judge Freeman granted the motion to strike the allegations of “willful and malicious” conduct by Tela – with leave to amend.
The decision to allow TSMC to amend highlights an important distinction about the ruling: although a corporation cannot itself commit willful and malicious conduct, the corporation can still be liable for punitive damages arising out of such conduct if the conduct is committed by the corporation’s officers, directors, or managing agents. Consequently, TSMC could still bring a claim for punitive damages against Tela if TSMC can appropriately amend its complaint to allege the identities of specific officers, directors or managing agents that are responsible for any “willful and malicious” conduct.
So while corporations cannot commit willful and malicious conduct under California law, they certainly can be liable for it. But plaintiffs must identify in their complaints the people (of the living and breathing variety) that are responsible for it.